TFP Estimation: Model

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Fear of China Is There a Future for
Manufacturing in Latin America? Mauricio
Mesquita Moreira IDB The Emergence of China
Challenges and Opportunities for Latin America
and Asia 3-4 December 2004, Beijing, China
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Motivation

• Its the manufacturing stupid!
• If anything, Chinas emergence in the world
  market challenges the view that the future of
  LAC is in manufacturing.

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Outline

• Does manufacturing really matter for LACs
  development?
• The nature and size of the challenge.
• The effects so far in terms of trade flows.
• Economic and policy implications.

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Manufacturing?

• Manufacturing bias in the traditional
  development literature. Normal pattern of
  development.
• Evidence of this bias in the endogenous growth
  theories and contemporary development literature
• Empirical evidence, for the most part, is
  circumstantial. Virtually every country that
  experienced rapid growth of productivity and
  living standards over the last 200 years has done
  so by industrializing Murphy, Shleifer and
  Vishny (1989),

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Manufacturing?

• Sachs and Warner (1995, 1997) , the first to
  present hard facts about the link between
  manufacturing and growth increasing returns and
  all that..
• Later disputed by , e.g., Lederman and Maloney
  (2003) and Manzano and Rigobons (2001). The
  issue would be export concentration and debt
  overhang.
• Yet, little is said about the link between
  natural resources and export concentration and
  debt. Stingy (2003), e.g. present robust evidence
  of Dutch disease.
• Indirect and negative impact of natural resource
  specialization on growth. E.g. Isham, Woolcock,
  Pritchett and Busby (2003),

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Manufacturing?

• The issue is far from settled but the police
  debate rages on in LAC.
• Two strands of manufacturing pessimism seems to
  prevail
• The World Bank (2002,2003) sticks to traditional
  trade theory and suggests that the regions
  future is agriculture and mining, seen a pathway
  to a knowledge economy. Look at Canada,
  Finland, Sweden.
• Blum and Leamer (2003) Natural resource rich
  communities invest their resources in land,
  permanent crops and extractive equipment and very
  little in human capital ..Countries that cannot
  attract manufacturing activities face the very
  difficult problem of how to find work both for
  new entrants into the labor force .
• But LAC is far way, rich in natural endowments
  and has a tropical climate far away
  resource abundant tropical countries have great
  difficulties attracting manufacturing activities,
  other than mundane and labor intensive tasks

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Manufacturing?

• Outright manufacturing pessimism seems to be
  unwarranted.
• Empirical evidence and Latin American own past
  belies enthusiasm for a natural resource
  solution. There are the issues of human capital,
  technological externalities, export concentration
  and institutions.
• Geographical and endowment determinism does not
  go a long way. As the new theories of growth
  suggest, accumulation of human capital and the
  ensuing process of learning and innovation can
  change a countrys destiny beyond its geography
  and natural endowments.

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• Whatever the truth , the fact is
• Manufacturing accounts in average for 19 of the
  GDP (2002).

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Manufacturing?

• True
• the manufacturing share of GDP has been declining
  rapidly
• still dominated by mundane resource and labor
  intensive goods or are concentrated in the
  labor-intensive links of the value chain
• has been thoroughly outperformed by East Asia
• But, there seems to be more to it than geography
  and endowments

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Manufacturing?
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Manufacturing?
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Manufacturing?

• In fact, there two important omitted variables
  in this story
• The poor and volatile macroeconomic environment
  throughout the 1980s and 1990s
• a reform of the state which has gone well beyond
  weeding out the excesses of the import
  substitution era.
• So, at the very least, it would risky and hasty
  for LAC to turn its back on manufacturing

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Manufacturing?

• In fact, there are least two important omitted
  variables in this story
• The poor and volatile macroeconomic environment
  that prevailed in most countries in the region
  throughout the eighties and nineties and a reform
  of the state which has gone well beyond weeding
  out the excesses of the import substitution era.

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Chinas Challenge

• Four main factors
• Endowments
• Productivity
• Scale
• The Role of Government

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Chinas Challenge endowments
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Productivity
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Productivity
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Productivity
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Scale

• The largest population in the world
• A surface that is roughly as large as the United
  States and 15 per cent larger than Brazil
• A US1.3 billion economy, which is edging closer
  to the size of the entire LAC economy (US1.6
  billion).
• The PPP figures are even more impressive, putting
  the Chinese economy only behind that of the
  United States. The largest Latin American economy
  in PPP termsBrazilis ranked 9th, with
  approximately 20 percent of the size of the
  Chinese economy.
• Chinese exports, at US365 billion, are already
  higher than those of LAC as a whole.

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Scale

• Advantages
• Cost edge on high fixed cost, high-tech
  industries (e.g. consumer electronics, domestic
  sales of US 41 billion, whereas Mexico has US
  10 billion and Brazil, US 9 billion)
• Better conditions to deepen the supply chain (the
  division labor depends on the size of the
  market)
• Lower infrastructure cost

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The Role of Government

• Factor and product markets.
• Factor side
• abundant supply of credit to local firms, at very
  competitive interest rates
• a public funded national innovation system, which
  has contributed to reduce the costs and risks of
  RD
• a pragmatic enforcement of IPRs.

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The Role of Government
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The Role of Government
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The Role of Government

• Factor and product markets.
• Product side
• Sector targeting e.g. semiconductors, automobile
  and software
• Firm targeting National Champions.
• Still complex dual trade regime, which favor
  exports and restricts access to the domestic
  market (trading rights and distribution services,
  import and export regulation, non-tariff measures
  and national treatment)

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Trade effects
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Trade effects
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Trade effects
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Trade effects
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Trade effects
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Trade effects
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Trade effects
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Trade effects the potential threat
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Trade effects the potential competition
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Trade effects the potential competition
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Conclusions

• Is there a future for manufacturing in Latin
  America?
• China does not make this future any brighter,
  given its combination of endowments, scale, fast
  productivity growth and a strong state.
• This is particularly true in a world market
  already overcrowded by at least three generations
  of Asian Tigers and facing the prospects of
  others, such as India, to come.

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Conclusions

• Not a reason for concern if manufacturing did not
  really matter for development. Yet, both theory
  and evidence suggest otherwise.
• Even leaving China apart, manufacturing in LAC is
  usually seen with pessimism on the grounds of
  geography and endowments. The tribulations of the
  sector on the last two decades seem to
  corroborate this view.
• Yet, geography and endowments do not tell the
  whole story.

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Conclusions

• the legacy of the ISI era, decades of
  macroeconomic volatility and the demonization
  government intervention, have to be factor in.
• These are all policy-related factors and
  well-designed policies, backed by strong
  institutions, can overcome the restrictions
  imposed by endowments and geography.
• It all depends a policy agenda, which should aim
  at a) the consolidation of the macro stability
  b) the formation of a large regional market to
  reduce de disadvantage of scale c) the
  relaxation of excruciating credit-constraints on
  local firms d) the enhancement of frail local
  technological capabilities